Common Pot Trust

Hello. My name is Kyle Krasa and I’m an estate planning attorney in Pacific Grove, California. I’m certified by the state bar of California, as a legal specialist in estate planning trust and probate law. The purpose of this video is to give you general information about an important aspect of estate planning law so that you can be prepared when working with your own attorney. Watching this video does not establish an attorney client relationship. The law is far more complex and nuanced than can be explained in a few short minutes. As a result, before acting on any of the information contained in this video, you should consult a competent attorney who is licensed to practice law in your community. With that understanding, I hope you enjoy my video and you find it informative. Thank you.

This video addresses a situation when equal is not necessarily fair. So let’s assume that a, you have a trust and upon your death everything is going to be divided in equal shares among your three children. So you have three children and you’ve decided that you’re going to get one third the child. Now on the surface, that seems really fair. How could it be any fairer than that? You have three children, everyone’s going to get a one-third equal share on the surface. That makes a lot of sense and a lot of times equal shares are fair, but not always. Let’s assume that the oldest child is say 24 years of age, so that child has had his or her parent or parents use 100% of their resources to get that person launched. That oldest child is 24 years of age, has already graduated college, maybe already has a graduate degree or a professional degree or is launched, is working, is out in the real world.

They’re all set. The middle child, let’s say is 21 years of age, so he’s had some of his or her parents’ support to get him or her to that point, but still needs a little more help to get launched. And then let’s say the youngest child is 17 so they haven’t even started college yet at all. The question at this point, if these are the ages of the three beneficiaries, when the parents die or the surviving parent dies, is it fair at that point to say to the youngest child who hasn’t even started college yet: “Yes. Your oldest sibling had 100% of your parents’ resources to get that person through college, through graduate school and launched. Yes. Your other sibling has had 100% of your parents’ resources to get that that person at least almost through undergraduate, and yet when it comes to you, just because of the timing of your parents’ death, all you get is one third.

So a lot of times parents in that situation recognize that that’s not necessarily fair to the younger children. That equal division under these circumstances is not necessarily fair. So the question then is, well, what can be done about it? What are the options here? Well, the one solution is to do something called a common pot trust. So that’s to say that when the parent dies or the surviving parent dies instead of the trust getting divided into equal shares among the children right away, um, there’s going to be this common pot trust. All of the assets are going to stay in one trust and the trustee is going to be given instructions that the trustee can distribute these assets to anyone or all of the three beneficiaries. But here’s the key. The trustee does not have to make equal distributions to all three of the children.

The trustee is permitted to give more money to certain children than others at the trustee’s discretion. And the trustee is going to be given these guidelines that instead of requiring equal distributions during the time that this common pot trust is in existence, they’re going to base distributions on need rather than equality. So presumably in this example, it will favor the younger beneficiary. The trustee will recognize, Hey, the oldest beneficiaries already had resources to get them educated and get them launched. The middle, uh, beneficiary might need a little bit more money than the oldest one because they haven’t gotten through everything. The youngest beneficiary is going to need the most money, most likely. And so there are, and it doesn’t have to favor the young ones, it likely will, but the direction in general will be: “Hey, trustee base distributions on need rather than equality.”

Now you don’t need to have this common trust forever. So usually these common pot trusts expire at certain age and they’re usually expressed as they’re going to last until the youngest child reaches a certain age. And let’s say in this example we say, okay, 22 so until the youngest child reaches that designated age and it’s rather arbitrary, but you pick an age where you think the child should be launched. So that could be 20 to 25, 30, 50, whatever you want it to be. Let’s say it’s 22, then everything’s in this common pot trust. We don’t divide into equal shares. Now the older kids can still have some of that money as well. It’s just the trustee doesn’t have to give equal distributions to, to all of them and can give more money to one child than the other and can base it on need.

Then when the youngest child reaches whatever age you decide, the common pot trust will then at that point end, and then whatever’s left over it goes into those three equal shares for the children. So a common pot trust is something to consider when there are multiple beneficiaries who are a few years apart in age and who have not been launched yet. So, uh, I often will discuss a common pot trust when there are young children in the picture. If all the children are adults, then we don’t even get into this common pot trust idea. But in the right circumstance, a common pot trust can be very useful in addressing those situations where equal is not necessarily fair.

I hope you enjoyed watching my video. As I mentioned at the beginning, this is not intended to be a substitute for proper legal counsel. Before acting on any of the information contained in this video, you should consult a competent attorney who is licensed to practice law in your community. Thank you.